Low Reverse Mortgage Securities Production is the ‘New Normal’

The reverse mortgage industry is currently seeing the effects of the October 2 changes on loan production, and the trend has trickled down into the securities market.

Issuers of Home Equity Conversion Mortgage-backed securities (HMBS) saw production of new, original loan pools fall to just $401 million in April, according to the most recent calculation from New View Advisors, a drop from March’s “anemic” $419 million.

“For the foreseeable future, this low level of new production may be the new normal,” the New York City-based firm noted in its analysis. 

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For comparison, December 2017 saw HMBS issuers generate $747 million in new issuance, a number that dipped to $657 million in January and $604 million in February.

Prognosticators in the reverse mortgage industry had long predicted that the Department of Housing and Urban Development’s changes last fall — which included a reduction in principal limit factors and a change to the mortgage insurance premium structure — would bring hardship to the reverse mortgage industry.

Last month, industry trackers Reverse Market Insight released statistics showing that HECM originations had dropped 17.6% in February, and New View predicted a “long winter” ahead in its previous HMBS analysis for March. The firm’s attitude has not changed since.

“Reverse mortgage lenders face a prolonged period of reduced volume, primarily due to the new lower principal limit factors for Home Equity Conversion Mortgages effective this fiscal year,” New View observed. “The supply of recently originated unsecuritized HECMS originated at the old PLFs is essentially exhausted, allowing the full effect of the new PLFs to hit hard.”

The news wasn’t all bad. Buoyed by $542 million in seasoned loan pools, the industry actually saw overall HMBS issuance increase to $1.2 billion month-to-month, which New View pegs as the seventh-highest month ever. 

“The supply of highly seasoned, unsecuritized HECM loans is a rapidly melting iceberg, but it’s a big iceberg,” the company noted. “Fannie Mae still has about $25 billion in HECMs on its books, years after ceasing its HECM loan purchases.”

Written by Alex Spanko

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  • As to reporting to the industry on Ginnie Mae HECM issuance, there is no one like New View Advisors. The major surprise in their portion of the article is the strong amount of tails still being generated by borrowers. That could even increase over time even as demand remains low due to the high percentage of adjustable rates being produced today that are replacing the fixed rate Standards of yesteryear.

    Fannie Mae’s portfolio of seasoned HECMs is a huge help when needed most. Hopefully that source will carry lenders for years to come.

    Tails are quite profitable to lenders since there are few direct or indirect costs associated with them as there are with originations. This should mean HECM approved mortgagees with long-time Ginnie Mae issuance operations should do well despite the loss in originations in the current period.

    Demand is at astonishing lows due to the impact of a new expected interest rate floor of 3%, lower PLFs (Principal Limit Factors), and with some significant exceptions, the changes to MIP.

  • I have to open my comment by saying that Jim Veale’s entire comment is right on target!

    I feel we as an industry need to apply a tremendous amount of pressure on HUD to change the expected interest rate floor of 3%. Pressure must also be applied for HUD to go back and increase the PLFs (Principal Limit
    Factors)! At least split the difference from what it was to what they lowered it to!

    It also goes without saying that some compromise has to be made with the new flat 2% MIP up front cost. Realistically the industry could live and accept 1.25%. This would at least balance out the previous MIP 60% ruling scale!

    If the items I suggested above could be implemented and changed by HUD, we would see a significant increase in business and enthusiasm from all of us in the reverse mortgage space!

    I am still confident that in time, even if we were not able to bring about the changes we need from HUD, we can bring back our volume. However, it will take a great deal of change as to our attitudes and the markets we must go after!

    John A. Smaldone
    http://www.hanover-financial.com

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